Clement B. Malin
General Manager of Corporate Planning & Economics Texaco Inc.
White Plains, N.Y.
From testimony on developing a National Energy Strategy (NES) given at U.S. Department of Energy hearings last month in Atlanta.
Energy is an integral and vital component of the economic strength and well-being of the U.S.
Ours is a country richly endowed with energy resources. As a nation, however, we have not chosen to rely solely on domestic sources of energy supply, nor does it seem likely that we will in the current planning horizon. Indeed, prevailing trends indicate just the opposite:
- U.S. energy consumption has resumed its upward climb.
- Domestic crude oil production continues to decline. Since 1986 domestic crude production has dropped nearly 1.7 million b/d, or 18%, in just 3 1/2 years.
- Significant volumes of U.S. crude oil are currently shut-in as uneconomic at current price levels.
- Exploration for new domestic reserves has not replaced production for a number of years.
- U.S. refineries are running at near capacity but are unable to cover demand, let alone projected growth.
- Imports of crude and petroleum products approximate 50% of U.S. demand and will continue to grow.
The U.S., therefore, faces the prospect of becoming increasingly dependent on foreign energy resources.
Energy markets have at the same time become irreversibly global, which makes international competitiveness a factor in our energy balance. As we move forward, failure to respond in a timely manner to the energy imperatives may cost us energy options and flexibility of immense value to U.S. society.
ENERGY, ENVIRONMENT
Coincident with increased energy awareness in the U.S. has been the dramatic increase of public concern for the environment. Some would argue that environmental objectives should take precedence over energy requirements.
In our view, it is not a case of either environment or energy.
That the two are inextricably intertwined is without doubt. That the two will at times appear to compete with each other is unavoidable. That continued growth and development of the U.S. requires that energy production and use and environmental goals and objectives be compatible and mutually supportive is a desirable and necessary national imperative.
Texaco accepts the challenge of meeting the environmental objectives of the nation while providing its energy supply. We are eager that a national consensus defines and sets a realistic timetable by which the country can reach its environmental objectives. We are committed to being part of the solution, and we are prepared technically to meet the challenge.
As the nation moves forward, however, we suggest two important principles that should govern the debate and the determination of environmental and energy policies:
- Costs of environmental measures to U.S. consumers and their impact on the nation's global competitiveness should be analyzed fairly, realistically, and publicly. Environmental programs should be designed to insure that all compliance costs can be identified and included in the cost of goods and services provided to consumers, thereby obtaining maximum conservation benefits.
- Government's role should be to establish reasonable standards and timetables for implementation, then to step back and let market forces determine the optimum means to achieve them. Setting our environmental goals must be based on sound science, using the best data and methods available. A competitive contest for the most cost effective solution is far preferable to arbitrarily mandated programs, no matter how well intentioned.
CALCULATING RISKS
Risk assessment, in an environmental context, is a relatively young scientific discipline, highly theoretical and inexact. The public should be made aware of the imprecision inherent in these methodologies. Public health must be protected, and this generally requires a reasonable margin of safety.
But the current methodology and assumptions used in calculating risks result in the expression of degrees of environmental risk that bear no resemblance to real life conditions.
Costs ultimately will be reflected in prices paid by consumers and will affect the ability of U.S. plants to compete in a global economy. We cannot afford to waste resources on programs that do not produce real benefits.
Establishment of reasonable environmental standards and achievable timetables is an appropriate function of government with the advice and counsel of all concerned constituencies.
The creative genius and technology of the nation's economic system can best determine the most cost effective way or ways to meet those standards.
Mandating solutions is not part of this process, nor should it be.
MAKING THINGS BETTER
Above all else, an NES should recognize things as they are and offer policies that improve undesirable features of the energy system.
The U.S. refining system is currently running at or near capacity, with demand continuing to grow each year.
Costs and uncertainties posed by potential alternate fuel mandates, air toxics controls, and waste disposal restrictions-combined with permitting complications-discourage new U.S. refining investment and threaten the shutdown of technologically weak and higher cost units.
The inescapable conclusion is that U.S. dependence on foreign fuels will increase.
Imports of finished products into the U.S. in 1987-89 are roughly 2 1/2 times what they were in the early 1980s. On the eastern seaboard, PADD 1, dependence on foreign products has reached roughly 30%.
Petroleum product markets are increasingly global and tariff barriers are minimal. In a worldwide energy market, the marginal supply from the lowest cost producer has a significant effect on prices.
A realistic NES must recognize that foreign export refineries will have an economic advantage in competing for the U.S. market if their environmental costs are lower, reflecting less stringent emission control and waste disposal requirements.
With today's global energy market, domestic refiners may not be able to recover their environmental costs. In such circumstances, profit margins are squeezed, limiting cash flows for new investment and placing significantly at risk the future viability of environmental improvement programs and perhaps the refineries themselves.
The recently proposed benzene regulations and pending toxicity characteristic rule are examples of environmental costs which only the domestic industry would face and which could not therefore be recovered in product prices in markets where imported gasoline is driving the prices.
The domestic industry faces unrecoverable costs in the billions of dollars. A toxicity characteristic rule alone could cost the petroleum industry $25 billion. If costs of this magnitude cannot be recovered, investments simply will not be made.
The result in such circumstances will be the closing of facilities and a shift of refinery investment to areas outside the U.S.
COMPETITIVE DISADVANTAGES
Texaco recommends strongly that the NES explore ways to help offset competitive disadvantages that U.S. refiners face as a result of environmental costs and in doing so encourages the swiftest possible investment in environmental programs.
U.S. refining and marketing operations must be able to make investments required for environmental purposes while remaining fully competitive.
There is an important distinction between environmental controls that apply to operations and those dealing with product specifications. Product specification regulations impose costs which any foreign refiner's exports would also be required to bear.
Where the product specifications apply equally to domestic and foreign refiners, there is unlikely to be any competitive concern. But in cases where U.S. refineries are required to reduce emissions and wastes toward zero discharge to protect refinery environs to a higher degree than foreign operators, a competitive disadvantage for U.S. refiners will exist.
Unless tariff or trade mechanisms are adopted to equalize the competitive disadvantage, the NES should include an "environmental investment tax credit" to enhance further environmental investment in U.S. refineries without jeopardizing their international competitiveness.
For example, refinery investments to reduce emissions of listed air toxics could cost the industry billions of dollars. In the absence of the proposed tax credit-perhaps similar in concept to the research and development tax credit-the U.S. may well witness the movement abroad of refineries to make transportation fuels, with the consequent impact on the nation's balance of payments and energy security.
Reviewing the clean air bills pending in the House and Senate, restrictions may be imposed on U.S. refiners, the costs of which are unlikely to be recoverable in the price of products because of less stringent environmental standards abroad. These include:
- Controls to reduce emissions of statutorily listed substances under the air toxics provisions. A current American Petroleum Institute study found the potential range of related costs for refineries alone at $1.3-15 billion, depending upon the technology definition and residual risk approaches used.
- Annual reductions in volatile organic compounds and possible NOx reduction at refineries to reduce smog. Combined costs in these areas approximate $4 billion.
To the extent that other sectors of the oil and petrochemical industry or other U.S. industries will face similar international competitive disadvantage, they also should be extended the benefits of the environmental investment tax credit.
U.S. energy security rests in no small measure on the U.S. manufacture of transportation fuels. A shift in the manufacture of these fuels abroad is not in the public interest.
The NES is assessing the inextricable link between energy and the environment. It is critical to the strength and well-being of the U.S. economy that energy and environmental objectives be compatible and mutually supportive.
U.S. policies, however, are made in a world market for energy, one on which we are becoming increasingly dependent. Environmental goals and objectives therefore must be developed with full and open debate of the cost/benefit balance, and standards established must avoid mandated solutions, allowing the market to develop cost effective solutions to meet reasonable standards in a timely fashion.
Competitive inequities that may arise from different standards overseas may require tailored offsets to protect U.S. energy security interests.
Copyright 1990 Oil & Gas Journal. All Rights Reserved.
